OREANDA-NEWS. Unity Bancorp, Inc. (NASDAQ:UNTY), parent company of Unity Bank, reported increased quarterly and year-to-date earnings. Major contributing factors included strong loan growth, expanded net interest margin, increased levels of noninterest income and expense control. 

Net income was $2.8 million, or $0.33 per diluted share, for the three months ended June 30, 2016, a 16.3% increase compared to net income of $2.4 million, or $0.28 per diluted share, for the same period a year ago.  Return on average assets and average common equity for the quarter were 1.03% and 13.59%, respectively, compared to 1.01% and 13.35% for the same period a year ago. 

Year-to-date net income was $7.0 million, or $0.82 per diluted share, for the six months ended June 30, 2016, a 61.0% increase compared to net income of $4.4 million, or $0.51 per diluted share, for the same period a year ago.  Return on average assets and average common equity for the period were 1.28% and 17.25%, respectively, compared to 0.92% and 12.23% for the same period a year ago. 

During the first quarter, the Company repurchased $5.2 million of its outstanding subordinated debentures at a price of $0.5475 per dollar, thus reducing its outstanding subordinated debt to $10.3 million.  The repurchase resulted in a nonrecurring pre-tax gain of approximately $2.26 million.   Net income, excluding the nonrecurring gain on the repurchased subordinated debentures, was $5.6 million, or $0.65 per diluted share, for the six months ended June 30, 2016, compared to net income of $4.4 million, or $0.51 per diluted share, for the same period a year ago.  Return on average assets and average common equity for the six months ended June 30, 2016 would have been 1.01% and 13.63%, respectively, compared to 0.92% and 12.23% for the same period a year ago. 

Management believes excluding the nonrecurring gain from year-to-date net income and reporting it in a format which is not in compliance with generally accepted accounting principles (“non-GAAP”) is beneficial to the reader and provides better comparability of the Company’s performance over both periods. 

Second quarter highlights also included:

  • Announced plans to open our 17th branch location in Emerson, New Jersey.
  • Total loans increased 11.4% compared to June 30, 2015.
  • Total deposits increased 11.9% and noninterest-bearing demand deposits grew 19.8% since June 30, 2015. 
  • Net interest income increased 11.6% compared to the prior year’s quarter due to strong loan growth. 
  • Net interest margin increased to 3.61% this quarter compared to 3.48% in the prior quarter due to a reduced Fed Funds balance.
  • Credit quality continues to improve.  Nonperforming loans fell 26.0% from June 30, 2015.

Mr. James A. Hughes, President and CEO, commented on this quarter’s performance, stating “During the second quarter we continued to execute on our plan and delivered another quarter of strong financial results.  We continue to build a platform for future growth and profitability.  That platform consists of high quality professionals that reach out to every small business in our footprint and sell our personalized banking services.  It is our culture of service that brings results.”

Net Interest Income

Net interest income, our core driver of earnings, increased $973 thousand to $9.3 million for the quarter ended June 30, 2016 compared to the prior year’s period, while year-to-date, net interest income increased $1.9 million to $18.3 million.  This increase was the result of strong commercial, residential mortgage and consumer loan growth over the past year.  Quarterly average commercial loans increased $52.2 million, average residential mortgage loans have increased $20.8 million and consumer loans increased $14.9 million compared to the second quarter in 2015.

The cost of interest-bearing liabilities equaled 1.05% for the quarterly and year-to-date periods.  While the quarterly cost of deposits increased 12 basis points to 0.82%, the cost of borrowed funds and subordinated debentures decreased 82 basis points compared to the prior year due to the modification of borrowings with the Federal Home Loan Bank (“FHLB”) over the past year.   The increase in the cost of deposits was primarily driven by the intentional growth of five year time deposits and a promotional savings product.

The net interest margin was 3.61% for the quarter-ended June 30, 2016, an increase of 13 basis points from the quarter-ended March 31, 2016.  The increase in the net interest margin for the quarter was due to lower yielding fed funds being deployed in the loan portfolio and the restructuring of our FHLB borrowing.  

Provision for Loan Losses

The provision for loan losses was $400 thousand for the three months ended June 30, 2016 and $600 thousand for the six months ended June 30, 2016.  In the prior year’s periods, there was no loan loss provision during the quarter ended June 30, 2015 and a $200 thousand loan loss provision for the six months ended June 30, 2015.   The increase in the quarterly and year-to-date provision for 2016 versus 2015 was due to higher net charge-offs in each period.  Net charge-offs were $276 thousand for the quarter and $601 thousand year-to-date at June 30, 2016, compared to net recoveries of $223 thousand and net charge-offs of $347 thousand for the quarter and year-to-date periods ended June 30, 2015.   

Noninterest Income

Noninterest income increased $341 thousand to $2.2 million for the three months ended June 30, 2016, compared to the same period last year.  Quarterly noninterest income increased due to gains on the sale of Small Business Administration (SBA) loans.   Year-to-date, noninterest income increased $716 thousand to $4.3 million due to SBA and mortgage loan gains on sale along with security gains.

SBA loan sales during the second quarter of 2016 totaled $7.2 million with a net gain of $637 thousand.  There were no sales during the prior year’s quarter.  Year-to-date, SBA loan sales totaled $10.6 million in 2016 and $3.5 million in 2015 with net gains on sale of $945 thousand and $363 thousand, respectively. 

During the quarter, $26.0 million in residential mortgage loans were sold at a gain of $593 thousand, compared to $27.1 million in loans sold at a gain of $687 thousand during the prior year’s quarter.  Our mortgage pipeline remains strong and we expect a good year in mortgage originations.  

In addition to the increase in noninterest income related to gains on SBA and mortgage sales noted above, other notable items included: 

  • Branch fee income declined in the quarterly and year-to-date periods due to lower levels of overdraft fees, partially offset by increased fees from commercial checking accounts.
  • Service and loan fee income declined in the quarterly and year-to-date periods due to reduced loan payoff fees.
  • Security gains totaled $81 thousand and $28 thousand for the quarters ended June 30, 2016 and 2015, respectively. Year-to-date, security gains were $175 thousand and $28 thousand.

Noninterest Expense

Noninterest expenses increased $76 thousand or 1.1% to $6.7 million for the quarter and $184 thousand or 1.4% for the six months ended June 30, 2016.  The increases in both periods were due to higher compensation and employee benefit expenses such as medical insurance, retirement and 401(k) plan benefits and other expense items such as director fees and employee training and education expenses.  These increases were partially offset by reduced occupancy expenses.       

Financial Condition

At June 30, 2016, total assets were $1.1 billion, an increase of $43.5 million from year-end 2015:

  • Total loans increased $26.1 million or 2.9%, from year-end 2015 to $915.0 million at June 30, 2016. Commercial, consumer and residential mortgage loan portfolios increased $16.2 million, $7.2 million and $4.3 million, respectively. 
  • Other assets increased due to the purchase of the Company’s Clinton, New Jersey headquarters for $4.12 million.
  • Total deposits increased $17.7 million or 2.0%, to $912.2 million at June 30, 2016.  Noninterest-bearing demand deposits increased $24.8 million and savings deposits grew $16.7 million, while interest-bearing demand and time deposits declined $13.4 million and $10.4 million, respectively.  The declines were due to reduced levels of municipal deposits from year-end and a roll-off of institutional certificates of deposit.
  • Borrowed funds increased $22.0 million to $114.0 million at June 30, 2016, due to increased overnight borrowings of $12.0 million compared to year-end 2015 and the addition of a $10.0 million Federal Home Loan Bank (FHLB) borrowing.  Also, during the six month period, $10.0 million in FHLB borrowings at an average cost of 4.27% were extended to 2020 at an average rate of 2.10%. 
  • Subordinated debentures decreased from year-end due to the repurchase of $5.0 million at a discount of $0.5475 per dollar.
  • Shareholders’ equity was $85.0 million at June 30, 2016, an increase of $6.5 million from year-end 2015, due to year-to-date net income less the dividends paid to shareholders and a decrease in accumulated other comprehensive income due to the fluctuation in interest rates.
  • Book value per common share was $10.01 as of June 30, 2016.
  • At June 30, 2016, the leverage, common equity Tier I, Tier I and Total Risk Based Capital ratios were 8.52%, 9.70%, 10.85% and 12.11% respectively, all in excess of the ratios required to be deemed “well-capitalized”. 

Credit Quality

  • Nonperforming assets totaled $8.2 million at June 30, 2016, or 0.90% of total loans and OREO, compared to $8.9 million or 0.99% of total loans and OREO at year-end 2015. 
  • Nonperforming loans decreased 9.9% to $6.5 million at June 30, 2016 from year-end.
  • OREO increased $111 thousand to $1.7 million at June 30, 2016 from year-end.
  • The allowance for loan losses totaled $12.8 million at June 30, 2016, or 1.39% of total loans compared to $12.4 million and 1.51% at June 30, 2015.
  • Net charge-offs were $276 thousand for the three months ended June 30, 2016, compared to net recoveries of $223 thousand for the same period a year ago.  Net charge-offs were $601 thousand for six months ended June 30, 2016, compared to $347 thousand for the same period a year ago. 

Unity Bancorp, Inc. is a financial service organization headquartered in Clinton, New Jersey, with approximately $1.1 billion in assets and $912 million in deposits.  Unity Bank provides financial services to retail, corporate and small business customers through its 15 retail service centers located in Hunterdon, Middlesex, Somerset, Union and Warren Counties in New Jersey and Northampton County,